Move along….nothing to see here!

Well it’s official!  The U.S. ‘officially’ exited recession back in June, 2009 according to the National Bureau of Economic Research.

“Any future downturn in the economy would now mark the start of a new recession, not the continuation of the December, 2007, recession, NBER said. That’s important because if the economy starts shrinking again, it could mark the onset of a “double-dip” recession.”

Semantics!  Let’s call a spade a spade.  The largest peace-time deficit spending in history has amounted to a rapidly-fading 15 month economic bounce.

Leading indicators are pointing to a renewed downturn.  A ‘double dip’ if you will….we’ll humor the folks at the NBER.  The ECRI Leading Index is still straddling the -10 level consistent with the onset of every recession since the creation of the index.  It came in at a slightly-improved -9.2 on September 17, better than the -10.1 a week earlier, but still indicating a massive divergence between the generally expected future growth rate and what the leading index is telling us.

Similarly, the Consumer Metrics Institute Growth Index, another great leading indicator continues its general trend lower.  We know that the consumer debtor is the life-blood of our dysfunctional economy (both the US and our own)  When consumers debtors stop buying crap they can’t afford, it slows ‘growth’.

I suppose that these leading indicators, which have been quite useful measures of future economic growth, could both be dead wrong.  It is possible.  But I wouldn’t want to take that side of the bet.

Regardless, this blog is about what is happening here in Canada.  So let’s connect the dots.  Our largest trading partner is still mired in a debt deflation cycle.  Consumers are not consuming.  Banks are not lending.  The Globe recently ran an interesting piece that supports my notion that America has turned a corner on consumerism and have instead started their secular shift towards frugality and savings.

I couldn’t help but chuckle at the title:  “Land of the free, Home of the tightwad”

Quotes:

“One of the most enduring changes wrought by the recession is how once free-spending Americans have changed their ways”

“It’s a shift that isn’t even very perceptible to an outsider, because it’s occurring in a place you can’t really see – in the American mind. But in a few years’ time, we’ll view it as one of the permanent changes wrought by the economic crisis.”

“Americans, the world’s great spenders, are learning the value of thrift. Or rather, they’re rediscovering it. At one time, the U.S. was a nation of savers, people who could be counted on to reliably sock away 7 to 10 per cent of their disposable income every month.”

This is the inevitable result of a debt-binged society coming to its senses in the aftermath of a busted debt bubble.  These deleveraging cycles take years to play out.  The US is 5 years into their own deleveraging cycle and would probably nearly be through it were it not for the misguided policies of the Fed and the government in general.  Their one-trick playbook is pretty simple:  Stimulate consumers so they can keep buying crap they don’t need so we can maintain this illusion of growth a little longer.  The problem is, they used that trick back in 2000 to reflate their economy and start an even bigger bubble.  Now they’re at a debt-saturation level.  Peak credit if you will.  Consumers can’t take on more debt.  Their incomes won’t allow them to and the banks are (wisely) unwilling to lend.  So the Fed and the government sustain this false economy with artificially low interest rates and unsustainable stimulus measures.  It amounts to a drop of water fighting against a massive tide of debt default and deleveraging.  It’s why the US is heading back into recession only 15 months after the largest peace-time deficit spending in history.

Earlier in the year, the McKinsey Global Institute produced a study in which they analyzed 45 other historical examples of debt deleveraging cycles similar to the one gripping the US and the one coming to Canada in 2011.   The report found that in the absence of war, default or a move to hyper-inflate, the average length of time a country spends in its deflationary deleveraging phase is seven years in the aftermath if its crisis.  During this time, asset prices and particularly leveraged assets are significantly depressed.

We’ve discussed the dynamics of a debt bubble at length on this blog, but suffice to say, our own debt bubble is imploding as we speak.  We’ve allowed real estate valuations to reach ridiculous levels when measured against fundamentals.  Our consumers and governments are maxed out.  We have a wave of boomers set to retire with no where near enough assets to sustain them.  This will be the cause of the tumultuous times ahead, and it all starts when people realize that their largest asset is not worth what they had hoped it would be.  The headlines should be hitting the newspapers by the time the snow really starts flying:  Year-over-year price declines.  The stuff of panic!

I’ll reiterate my big-picture positions on both the future of real estate and on the associated social effects of a busted debt bubble:

We should see 5-10% year-over-year declines by the New Year.

2011 should see a further stagnation of another 10%

People will stop tapping their home equity when they realize that it is melting away like a snowball in July.  Credit will begin contracting by mid 2011.

We will be back in recession here in Canada by Q3 2011 though it may not be officially reported until they figure it out several months later.

This credit contraction will last for several years, likely 5-7.  House prices will not see their 2010 summits again until at least 2015 and I would not be surprised if the general trend is still downward 5 years out.

We will see a significant contraction in private sector jobs, particularly in construction, manufacturing, real estate and financial services, travel, etc.

The government will predictably try to fight the tide via stimulus 2.0….then 3.0…..then 4.0….until people finally realize that we are screwing over our future generations to preserve an illusion of wealth that never really existed.  Then austerity will rule.

Pensions will be in serious trouble.  Large public pensions will face serious underfunding issues.  Most will switch to defined contribution.

The political climate will turn against public sector unions.  We’re not there yet, but as the recession hits home, the private sector will eventually figure out that they are taking a reduction in their standard of living in a time of falling incomes to give guaranteed pay raises to public sector unions.  We will see the political atmosphere that will (finally) allow a person like NJ Governor Chris Christie step in and correct the ship of public finance.  I’m a member of a public sector union and I know I risk my own job advancement making statements like this, but I’m quite tired of seeing future generations put on the hook for over sized promises that can’t be honoured in our current economic climate, not to mention the one to come.  Unions have a vital role.  But it’s not to bleed the private sector dry….to approach every salary negotiation with an attitude of ‘let’s get all we can get’, regardless of how the private sector (who pay our wages) is faring economically.  It is the height of ignorance and arrogance to demand a 3% annual pay raise at a time when private sector wages are stagnating or falling, saying in essence, “I’m fine with you (the private sector) taking a reduction in your standard of living to further subsidize my own comfortable standard of living”.  Give me a break!  This won’t end well.

People who are building their cash position will be in great shape to take advantage of the many opportunities that will arise once the fog lifts.  Prepare now.

Cheers

Ben

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3 Responses to Move along….nothing to see here!

  1. i.see.debt.people says:

    We should see 5-10% year-over-year declines by the New Year.

    a bit conservative…i’m betting 20-25% year-over year drop in house prices by Jan 2011

    • I’d like to think you’ll be right, but with year-over-year prices not turning negative until likely October, that means a 20-25% drop over last year’s prices in a couple months. Not likely, but certainly possible. Prices tend to be sticky unless there is a major attitude of panic. House prices dropped a total of less than 20% nationally during the financial crisis of 2008. Not likely they will drop by a greater amount in such a short time period without the accompanying panic.

      But…..we agree on the 25% drop at SOME point.

      Cheers

      • DancinPete says:

        “House prices dropped a total of less than 20% nationally during the financial crisis of 2008”
        back in 2008 you could say: “housing never goes down” and people believed. This time, when someone says that you can say “look at the US, UK, OZ etc. etc.”
        I’m not sure when exactly it will happen, but I think that people will be quicker to panic this time, all trying to get out quick, once the writings on the wall.

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